THE INFLATION - DEFLATION TUG OF WAR : WHAT YOU NEED TO KNOW

 

Inflation and deflation are important concepts that can have a significant impact on the economy of a country .

Inflation refers to increase in the general price level of goods and services in an economy over a period of time . When the general price levels rise , each unit of currency buys fewer goods and services ; consequently , inflation reflects a reduction in the purchasing power of money - a loss of real value in the medium of exchange and unit of account  with in an economy.

CAUSES

• Demand pull inflation : when high level of demand and goods occurs in an economy, this can happen when an economy is growing rapidly and more money is available to spent.
• Cost pull inflation : When increase in the price of raw materials or an increase in labor cost happens it will lead to higher price of goods and services.
• Currency devaluation.
• Monopoly of power.
• Government policies.

WAY FORWARD

• Use monetary policy.
• Implement fiscal policy.
• Implement Structural reforms.
• Educate the public.

Deflation is the opposite of inflation, and it refers to a sustained decrease in the general price level of goods and services over a period of time. When the general prices falls, each unit of currency buys more goods and services ; consequently deflation reflects an increase in the purchasing power of money.

In India , the Reserve Bank of India (RBI) is responsible for maintaining price stability and ensuring that the rate of inflation is with in the target range set by government. The RBI uses various monetary policy tools, such as adjusting interest rates and controlling the supply of money , to achieve its inflation target.

Over a past few decades India has experienced both inflation and deflation . In 1990's India experienced high rates of inflation , driven in part by structural factors such as supply bottlenecks and the lack of competition in certain sectors . However , since the early 2000s, the RBI has been successful in bringing down inflation to more manageable levels through the use of monetary policy tools.

In recent years, India has faced deflationary pressure due to a slowdown in economic growth and declining commodity prices . However , the RBI has been able to keep inflation with in target range by using a combination of monetary policy tools and structural reforms.

In conclusion , inflation and deflation are important economic concepts that can have a significant impact on the economy of a country . In India, the RBI has been successful in maintaining  price stability and keeping inflation with in the target range through the use of  monetary policy tools and structural reforms.